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13 November 2018
In a recent case, the High Court considered whether in principle a judgment creditor is entitled to a charging order over funds paid into court by a judgment debtor in a different action involving another party. In so doing, the court considered a judgment debtor's interest (as the paying party) in funds that it had paid into court. The court accepted that in such circumstances a charging order could be made and that, on the facts, it was appropriate to do so. The case is an interesting insight into a paying party's beneficial interest in funds paid into court and a judgment creditor's ability to obtain a charging order over that interest.(1)
In this case, the plaintiff law firm obtained a judgment debt against the principal defendant with respect to legal costs incurred at a time when it had acted for the defendant (judgment debtor). The outstanding sum was sizeable. The plaintiff recovered some of the judgment debt and sought to recover the outstanding balance from the defendant.
The defendant had commenced unrelated court proceedings against another party. In those other proceedings he had been ordered to pay money into court as security for that other party's legal costs on the basis that, as the claimant in those other proceedings, he was ordinarily resident outside Hong Kong. The amount of that security appears to have been a little less than the outstanding sum of the plaintiff's judgment debt.
The plaintiff (judgment creditor) obtained an initial charging order over the funds paid into court by the defendant in the other action. On the plaintiff's application to make the order final, two issues arose. First, whether the court could in principle grant a charging order over funds paid into court by a judgment debtor as security for costs in another action. Second, if so, whether the defendant had a beneficial interest in the funds in court and in respect of which a charging order could be granted.
Sections 20A(1) and(2) of the High Court Ordinance (Cap 4) allow the court to grant a charging order over a debtor's asset in which they have a beneficial interest. An asset for this purpose includes land, shares and funds paid into court.
The defendant (judgment debtor) argued that a party that pays funds into court pursuant to an order for security for costs does not retain a beneficial interest in those funds for the purposes of Section 20A of the ordinance. While it was not disputed that funds in court could be subject to a charging order, there appeared to be few (if any) reported cases on whether a charging order could be granted with respect to funds paid into court pursuant to an order for security for costs in another action.
The defendant also argued that, in any event, the funds in court were subject to a trust claim in favour of his brother, whose company had arranged for a loan to be made to the defendant in order to make the payment into court.
For the purposes of Sections 20A(1) and (2) of the ordinance, the court decided that a charging order could be granted over funds paid into court as security for costs. This principle also applied with respect to funds paid into court in another action.
The court also considered that, although the funds had been paid into court pursuant to a court order and could be paid out only in accordance with a court order, the paying party still retained a sufficient beneficial interest in the funds. At the same time, the party in whose favour the funds had been paid into court had acquired a type of security interest (having regard to the purpose for which the funds were paid), but this was not inconsistent with the paying party retaining a beneficial interest.(2)
This essentially decided the two principal issues – save for the defendant's further argument that (on the facts) the funds were subject to a specific trust claim in favour of his brother or the company beneficially owned by him which had made a loan to the defendant in order to pay the funds into court. On the facts, the court found that this claim was not made out because the characteristics of the loan suggested that the defendant was free to dispose of the money as he wished.(3)
As a result, the court ordered that the initial charging order be made final.
The case is an interesting review of the respective interests of the parties when funds are paid into court pursuant to a court order. It concerns the application of established principles to what appears to be a different situation, but one that may give other litigants pause for thought.
It is worth emphasising that, in applying for the charging order, the plaintiff (judgment creditor) was not seeking to interfere with the prior claim of the original party in the other action in whose favour the funds had been paid into court. It appears that the other party had obtained costs orders in his favour against the defendant (judgment debtor) and, therefore, had a prior claim to at least part of the funds paid into court.
Therefore, the strategy of the plaintiff in obtaining the charging order appears to have been to obtain some satisfaction of its judgment from the funds in court in the event that there was a surplus.(4) Such strategy might also help focus the defendant's mind on the balance of the plaintiff's outstanding judgment. A judgment creditor's enforcement options are not mutually exclusive.
For further information on this topic please contact David Smyth or Warren Ganesh at RPC by telephone (+852 2216 7000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
(2) Supra note 1, at paragraph 14. As a general observation, the security interest of a party in whose favour money is paid into court is contingent (on the purpose for which the money is paid); this helps to explain the rationale of the court's decision.
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